The automotive market appears to be turning a corner! This good news is reflected in the latest update from Carsales.Com Ltd (ASX: CAR) although many brokers are reluctant to recommend the stock as a buy.
Not that there's anything wrong with the online car classifieds business. It's just that the Carsales.Com share price has surged 67% since the S&P/ASX 200 Index (Index:^AXJO) struck the bear market low three months ago.
But there might be a better way to gain leverage to this thematic – and that's through the ASX-listed novated leasing and fleet management companies.
Better option than Carsales.Com?
Morgan Stanley recently upgraded two in the sector as it believes these stocks will be re-rated.
The broker pointed out that new car sales and the macro economic environment are "important drivers" for the sector (I'm sure the pun's intended).
But it also pointed out that some recent macro and regulatory headwinds can cause a divergence in performance among the individual stock names.
How to pick the best of the bunch
There are three areas the broker is looking at to pick the best winners in the sector. The first is differentiated growth. While all companies will benefit from any improvement in car sales and economic activity following the COVID-19 shutdown, some will benefit from additional growth levers.
Next is business model resiliency. This describes how a company can weather changes in lending appetite and funding, as well as regulatory and consumer scrutiny.
The third is valuation. The key is to look for underappreciated stocks with share price catalysts.
ASX stocks that stand out
The standout after applying these three filters is Eclipx Group Ltd (ASX: ECX) with Morgan Stanley describing the stock as its highest conviction pick.
The broker believes it's the one with the highest growth potential and with a unique funding model that its competitors are trying to replicate.
Morgan Stanley upgraded the stock to "overweight" from "equal-weight" with a price target of $1.70 a share.
Another stock that got upgraded to "overweight" is McMillan Shakespeare Limited (ASX: MMS). The broker likes McMillan as it has an additional income stream from its Plan Partners business, which helps offset any weakness from novated leases.
The group is also building a strong balance sheet to management options in unlocking value. A strategic review of its business may also trigger a re-rating in the stock.
Morgan Stanley's price target on McMillan is $11.50 a share.
